4.
EXAMPLE - STONE MONEY OF YAP
Early money
transfer on the
island of Yap
Eventually
islanders decided
not to move
stones around…
…and instead
keept verbal track
of who owned
what share of
each stone…
…even a stone
that sank to the
bottom of the
sea remained
currency in
circulation

5.
INNOVATION C - CREDIT
Asset
Liability
EXAMPLE - TALLY STICKS OF MEDIEVAL EUROPE
Credit was carved into a split
tally and the debtor and the
creditor each got one half. The
technique became common in
medieval Europe, which was
constantly short of money
(coins). The split tally was
accepted as legal proof in
medieval courts and the
Napoleonic Code (1804) still
makes reference to the tally stick
in Article 1333.

12.
ENTER DIGITAL MONEY - BITCOIN
• Decentralized digital currency
• Not backed by any government or organization
• Instantaneous peer-to-peer transactions
• No need for trusted third party
• No counter party risk
• Cryptographic security
• Low cost banking for everybody everywhere
• Inflation proof
• Based solely on the consensus that it has value

13.
Distributed ledger – same copy in every node
• The receiver now can spend that amount
• Transaction cost = virtually zero
• Time = ~10 minutes
PAYER
RECEIVER
Receiver’s public
key/adress
HOW BITCOIN WORKS
Long version:
1. New transactions are broadcast to all nodes.
2. Each node collects new transactions into a block.
3. Each node works on finding a difficult proof-of-work for its block.
4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
5. Nodes accept the block only if all transactions in it are valid and not already spent.
6. Nodes express their acceptance of the block by working on creating the next block in the
7. chain, using the hash of the accepted block as the previous hash
8. https://bitcoin.org/bitcoin.pdf

14.
GLOBAL AND INSTANT REACH
• Protesters in Kiev held signs for the television
cameras asking for money in 2014
• Thousands around the world pointed their cellphone
cameras at the on-screen video and made donations
with literally three clicks
• The transactions were communicated in 20 seconds
and confirmed within ten minutes at a cost of a
fraction of a cent per dollar
• Transactions were anonymous: the government
could not monitor them, and the recipients did not
know whom to thank.
- Boston Consulting Group – Thinking Outside the Blocks December 1, 2016
UKRAINIAN EXAMPLE

20.
WHAT IS THE BIG DEAL?
• Global payments could become instant, available to anyone with a smartphone and
very cheap regardless if transactions are cross border
• The new global payment network would not involve incumbent infrastructure from
institutions such as VISA, Mastercard, American Express, or banks
• Former depositors can hold large quantities of electronic money without having to
expose themselves to counterparty risk or worry about physical storage
• The Bitcoin network has not been down since its inception in 2009
• A full scale adoption of digital money could be very disruptive for banks as they still
make large part of their living on facilitating transactions*
• The 2nd, and perhaps most disruptive change, would be a disappearing demand for
transaction accounts from households and corporations
* Payment fees make up 40% of global banks’ total revenue according to McKinsey report “Global Payments 2015: A Healthy Industry Confronts Disruption”

21.
BANKS ARE VERY DEPENDENT ON DEPOSITS
Capital
> 1 Year funding
Deposits from households and SMEs
Other deposits
Derivatives
Source: Liquidatum and Riksbanken
10
20
30
40
50
60
Almost 40% of
European banks’
assets are funded
by deposits
Funding of European banks’ assets, %

22.
IF DEPOSITS MORPH INTO DIGITAL CASH
• Banks would have to offer higher rates to convince the public to lend them money
• Higher funding costs would likely depress profitability of the banking sector
• Lower bank sector profitability could affect credit ratings which would put upward pressure on wholesale
funding costs as well
• Higher bank funding costs means increased cost of credit for banks’ borrowers
• Higher borrowing costs could impact asset prices like residential and commercial real estate, equities,
bonds, commodities, infrastructure etc.
• Banks ability to “create money” would be materially impacted and as such central banks’ ability to
conduct monetary policy through the banking system will be too
• Ironically, banks could help make the problem worse as digital cash could become a more attractive asset
to keep as liquidity reserve instead of today’s central bank deposits, government bonds and other banks’
covered bonds. Today’s issuers of instruments that are held as liquid assets i.e. governments and
mortgage institutions, could see funding costs go up for this reason too.*
• In the end, we would probably end up with a safer banking system, with less maturity transformation and
higher quality liquidity reserves – the transition could be somewhat uncomfortable though - for banks’
shareholders, holders of impacted assets and highly indebted borrowers that are dependent on the
perseverance of low cost of credit
* 15% of total assets, of banks under Basel Committee supervision, are so called ”high quality liquid assets” according to speech by Basel Committee Chairman Stefan Ingves 2 December 2016

23.
THESE THOUGHTS ARE ACTUALLY NOT THAT NOVEL
“I think that the Internet is going
to be one of the major forces for
reducing the role of government.”
“The one thing that’s missing, but
that will soon be developed, is a
reliable e-cash, a method whereby
on the Internet you can transfer
funds from A to B, without A
knowing B or B knowing A.”
- Milton Friedman 1999, Nobel
Laureate 1976
https://www.youtube.com/watch?v=6MnQJFEVY7s
M. Friedman 1999 F.A. Hayek 1990

25.
DISCLAIMER
This material focuses on the potential of digital money. It does not focus on risks. As such here follows a few
notes for nuance and disclosure
• Although the author owns some cryptocurrency, this material does not constitute advise to anyone to
invest in bitcoins or other cryptocurrencies
• Bitcoin is a young technology and it takes relatively deep knowledge for individuals to handle digital
currency in a secure way. There is no way to retrieve lost bitcoins when a private key is lost or stolen.
• The price of cryptocurrency, in particular cryptocurrency that is not Bitcoin, has been very volatile.
• Most institutions like exchanges, custodians etc in the cryptocurrency space are less mature and far less
regulated than blue chip institutions. As such there have been examples of both poor governance and
fraud causing customers financial harm.
• When it comes to Bitcoin in particularly a disproportionately large share of trading and confirmation of
transactions take place in China which makes the global network somewhat vulnerable to Chinese
government’s stance on cryptocurrencies.
• Tax and legal treatment of digital currencies differ significantly between jurisdictions. Also, in some parts
of the world, typically in jurisdictions with unstable state backed monetary regimes, there are examples of
when governments have taken outright hostile positions on digital currency.